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on Market Microstructure |
| By: | Ethan Cohen-Cole (University of Maryland - College Park); Andrei Kirilenko (Commodity Futures Trading Commission); Eleonora Patacchini (University of Rome - La Sapienza) |
| Abstract: | Network spillovers explain as much as 90% of the individual variation in returns in a fully electronic market. We study two fully electronic, highly liquid markets, the Dow an S&P 500 e-mini futures markets. Within these markets, we use a unique dataset of realized trades that includes the precise topology of transactions; this topology allows us to identify precisely both the relevance of network structure as well as endogenous network spillovers. Within these markets, we will show that network positioning on the part of trader leads to remarkable spillovers in return. Empirically, we estimate that the implied average multiplier, the ratio of a individual level shock to the total network one, is as large as 20. A gain of $1 for a trader leads to an average of $20 in gains for all traders and much more for connected ones. In a zero-sum market, such as the one in this study, this suggests a very large re-allocation of returns according to network structure. |
| JEL: | G10 C21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1011&r=mst |
| By: | Jank, Stephan; Wedow, Michael |
| Abstract: | This paper investigates the returns and flows of German money market funds before and during the liquidity crisis of 2007/2008. The main findings of this paper are: in liquid times, money market funds enhanced their returns by investing in less liquid papers. By doing so they outperformed other funds as long as liquidity in the market was high. Investing in less liquid assets, however, widens the narrow structure of money market funds and makes them vulnerable to runs. During the shortening of liquidity caused by the subprime crisis, illiquid funds experienced runs, while more liquid funds functioned as a safe haven. -- |
| Keywords: | Money Market Funds,Liquidity Crisis,Strategic Complementarities,Runs,Narrow Banking |
| JEL: | G12 G20 G21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1016&r=mst |
| By: | Chesney, Marc; Kempf, Alexander |
| Abstract: | This paper determines the value of asset tradeability in an option pricing framework. In our model, tradeability is valuable since it allows investors to exploit temporary mis-pricings of stocks. The model delivers several novel insights on the value of tradeability: The value of tradeability is the larger, the higher the pricing efficiency of the market is. Uncertainty increases the value of tradeablity, no matter whether the uncertainty results from noise trading or from new information about the fundamental value of the stock. The value of tradeability is the larger, the longer the illiquid stock cannot be traded and the more trading dates the liquid stock offers. -- |
| Keywords: | Tradeability,Liquidity,Option Pricing |
| JEL: | G13 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1011&r=mst |
| By: | B. Dupoyet; H. R. Fiebig; D. P. Musgrove |
| Abstract: | We explore a simple lattice field model intended to describe statistical properties of high frequency financial markets. The model is relevant in the cross-disciplinary area of econophysics. Its signature feature is the emergence of a self-organized critical state. This implies scale invariance of the model, without tuning parameters. Prominent results of our simulation are time series of gains, prices, volatility, and gains frequency distributions, which all compare favorably to features of historical market data. Applying a standard GARCH(1,1) fit to the lattice model gives results that are almost indistinguishable from historical NASDAQ data. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1010.4831&r=mst |
| By: | Frey, Stefan; Herbst, Patrick |
| Abstract: | We present evidence of the impact of buy-side analysts on the behavior and performance of fund managers. Using data provided by a large global asset manager, we relate buy-side analysts' recommendations to fund transactions on a daily basis. Our results show that buy-side analysts have a significant influence on trading decisions: Fund managers almost certainly follow recent recommendation revisions in their trades. Fund flows and sell-side recommendations matter as well, but to a lesser extent. Positive abnormal returns to buy-side analysts' revisions are also reflected in the performance of mutual fund trades: trades triggered by buy-side recommendations have higher returns than other trades. -- |
| Keywords: | buy-side analysts,analyst recommendations,mutual funds,investment decisions,investment performance |
| JEL: | G23 G11 G29 M41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1010&r=mst |
| By: | Frederic Abergel; Aymen Jedidi |
| Abstract: | We present a mathematical study of the order book as a multidimensional continuous-time Markov chain where the order flow is modelled by independent Poisson processes. Our aim is to bridge the gap between the microscopic description of price formation (agent-based modelling), and the Stochastic Differential Equations approach used classically to describe price evolution in macroscopic time scales. To do this we rely on the theory of infinitesimal generators. We motivate our approach using an elementary example where the spread is kept constant ("perfect market making"). Then we compute the infinitesimal generator associated with the order book in a general setting, and link the price dynamics to the instantaneous state of the order book. In the last section, we prove the stationarity of the order book and give some hints about the behaviour of the price process in long time scales. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1010.5136&r=mst |
| By: | Grammig, Joachim; Peter, Franziska J. |
| Abstract: | The trading of securities on multiple markets raises the question of each market's share in the discovery of the informationally efficient price. We exploit salient distributional features of multivariate financial price processes to uniquely determine these contributions. Thereby we resolve the main drawback of the widely used Hasbrouck (1995) methodology which merely delivers upper and lower bounds of a market's information share. When these bounds diverge, as is the case in many applications, informational leadership becomes blurred. We show how fat tails and tail dependence of price changes, which emerge as a result of differences in market design and liquidity, can be exploited to estimate unique information shares. The empirical application of the new methodology emphasizes the leading role of the credit derivatives market compared to the corporate bond market in pricing credit risk during the pre-crisis period. -- |
| Keywords: | price discovery,information share,fat tails,tail dependence,liquidity,credit risk |
| JEL: | G10 G14 C32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1006&r=mst |